By Jerry Carter. A current issue in securities arbitration is whether, and under what circumstances, an issuer of securities may compel a member of the Financial Industry Regulatory Authority (“FINRA”) to arbitrate a dispute. The United States District Court for the District of Nevada recently issued a decision permitting the City of Reno to arbitrate a dispute with Goldman, Sachs & Co. (“Goldman”) arising out of auction rate securities issued by the City of Reno and underwritten by Goldman. Goldman, Sachs & Co. v. City of Reno, Case No. 3:12-cv-00327 (Nov. 26, 2012).
FINRA Rule 12200 permits a “customer” to compel arbitration with a member of FINRA. From 2005 through 2006, the City of Reno issued approximately $211 million in auction rate securities (“ARS”) that were underwritten and brokered by Goldman. In February 2012, the City initiated a FINRA arbitration against Goldman alleging wrongdoing by Goldman in arising out of the underwriter agreements and broker-dealer agreements. Goldman then petitioned the District Court to block the arbitration, claiming that the City is not a “customer” entitled to compel arbitration.
The Court held that the City of Reno is a customer because the broker-dealer agreements provide for the City to pay fees in exchange for Goldman’s services in facilitating auctions of the securities the City issued. A “closer question” was “whether the alleged wrongdoing in this case is directly related to the facts that make the City a customer.” The alleged wrongdoing in the FINRA arbitration concerns the underwriting, not the auction facilitation, “and the auction facilitation is the only jurisdictional purchase the City has upon the FINRA arbitration requirement.” Nevertheless, Goldman, as a FINRA member agreed to FINRA arbitration on the issue of arbitrability itself. Therefore, it is for FINRA to determine whether the claims are arbitrable.
When a customer of a FINRA member has a choice between filing claims in court or in a FINRA arbitration, the choice should be thoroughly considered with the assistance of competent counsel. This case illustrates that when the customer chooses to proceed in a FINRA arbitration, that choice will in all probability be honored.